Energy Insider Blog

At the Texas Public Power Association conference on July 24^th, Trip Doggett, the CEO of the Electric Reliability Council of Texas (ERCOT) provided a tremendous amount of information and insight in to the state of the Texas wholesale power market.  Some of the key areas he covered included:

Shale gas exploration and production has been a boom to the energy sector.  Suddenly, the U.S. is awash in ample supplies of natural gas and oil.  The explosion in energy resources available from shale deposits in the continental U.S. has led the Energy Information Administration to opine that the U.S. could be completely energy self-sufficient in the next 20 years.  However, this unexpected expansion of oil and gas exploration and production has stressed the electric transmission systems, especially in areas of West Texas, where the available transmission capacity has not been able to keep up with demand.  Electricity usage in West Texas has risen more than 20% since 2009. Therefore, congestion costs increased dramatically. From 2011 to 2012, congestion charges increased ~390% on average.

According to the Energy Information Administration (EIA), the electricity generation sector is responsible for over 90% of the total coal consumption in the U.S., and coal fired generation has historically been the most prominent source of electricity production.  As seen in the graph below, however, natural gas has been increasing its market share as generation feedstock over the past couple of years. In February 2012, Coal and Natural Gas had the same percent share of power generation in the U.S.

In 2012[1], the Environmental Protection Agency (EPA) suffered a legal set-back as the Court of Appeals for the District of Columbia (D.C. Appeals Court) struck down the agency’s Cross-State Air Pollution Rule (CSAPR).  CSAPR set emission reductions goals for sulfur dioxide and nitrogen oxide for not only the pollution sources in the state, but also attempted to regulate these emissions that are blown across state lines. 

Every year, Potomac Economics, publishes Independent Market Monitoring (IMM) reports for multiple electricity wholesale markets. The annual reports provide a competitive assessment of such markets.  Over the past several years, the IMM has consistently found that the ERCOT markets are generally competitive and functioning well, although the IMM has always suggested market enhancements.  In the 2012 State of the Market Report, there was significant emphasis in discussing one of the largest challenges facing the ERCOT market—future resource adequacy.  While resource adequacy presents a challenge to ERCOT as the grid operator, it provides opportunities for end users to participate in Demand Response programs as part of a comprehensive risk management strategy.

In many states, end use customers, have the choice to select energy suppliers to serve their natural gas and/or electricity needs. While selecting an energy  supplier might seem to be a simple task, there are multiple factors that need to be considered. Choosing a supplier based only on “lowest price”, could result in unexpected charges and unpleasant surprises down the road.  

As business has become increasingly competitive, the importance of controlling costs wherever possible has increased as well.  In various parts of the country, one area of potential cost control involves energy procurement.  While the opportunity to control energy costs exists, understanding this opportunity and capitalizing on it requires careful analysis and planning.

Typically, discussions about drought conditions center on the impact a lack of rain has on agriculture; however, water and drought conditions have a significant impact on the energy sector as water is used for cooling purposes in power plants and the lack of water can negatively impact generation, creating stress on the electric grid during periods of high demand.  While the impact of water on power plant output has been understood for years, the explosion in fracking has added another pressure point on the water supply.

According to the National Oceanic and Atmospheric Association (NOAA), summer 2013 will be above average in West Texas and in the Mid-Atlantic states.  The outlook both in terms of temperatures (left hand side) and projected rainfall (right hand side) is summarized in the following set of four maps, with the top maps being the outlook for June and the bottom ones the outlook for the entire summer (June-August).

According to the National Oceanic and Atmosphere Administration (NOAA), the 2013 Hurricane Season is predicted to be more active than normal.  In its forecast released on May 23^rd, NOAA anticipates 13-20 named storms, with 7-11 of those becoming hurricanes and 3 to 6 of those being Category 3 or higher hurricanes.  The averages call for only 12 named storms, 6 hurricanes and only 3 of those becoming major storms.  Given this outlook, the question becomes how will this impact natural gas prices?